for Wealth Advisers - An innovative way to pass on more of your client’s estate to their loved ones

• LTMs are often used to provide a ‘living inheritance’ to pass wealth down to the next generation. It means the client can see the recipient/s enjoy the gift, and could be especially helpful where friends or family members have been negatively impacted by the coronavirus pandemic.

• This strategy can be very effective where there may be a future inheritance tax (IHT) liability by taking advantage of Potentially Exempt Transfers (or Chargeable Lifetime Transfers within the clients’ nil rate band). 

• And it has both short-term and longer-term benefits: legacy planning can be actioned as soon as the funds are released, and the resulting loan plus its rolled-up interest create a debt which reduces the taxable value of the estate. 

Different types of asset have different characteristics when it comes to legacy and tax planning: 

Defined Contribution (DC) pension funds

• Funds can be passed on to beneficiaries free of tax if the holder dies before age 75 and are normally not subject to IHT.
• If the holder dies after age 75, the funds are subject to income tax at the rates relevant to the beneficiaries and are normally not subject to IHT.
• So income from pension funds could, for example, be withdrawn subject to 20% income tax by beneficiaries who are basic rate tax payers.
• Pension funds that exceed the lifetime allowance may be subject to additional tax charges.

ISAs or other liquid investments

• Can be used for income but are also attractive for gifting or other trust based strategies and it may be best to leave these. 
• Similarly, assets that may attract capital gains tax may be better left untouched until after death.

Using property to generate income

• If pension and other income won’t support the client’s requirements, using an LTM means the client’s property equity can generate a tax efficient income:
• Lifetime mortgage rates are comparable to other long term fixed mortgage rates such as those offered on Retirement Interest Only mortgage.
• And, the drawdown facility means interest is only paid on the funds when they’re released. 

This arrangement offers the following legacy planning benefits:

• The LTM funds released aren’t taxable so a higher rate taxpayer only needs to drawdown the net income amount they require, instead of the gross amount before tax. This can result in a significant income tax saving.
• The LTM and accumulated interest reduce the value of the estate. This is particularly relevant for estates worth more than the client’s (and spouse’s if relevant) Inheritance Tax Nil Rate Band and Residence Nil Rate band.
• Pension funds aren’t depleted and can be passed on free of IHT.
• Income from inherited pension funds are tax free if the holder dies before age 75. If the holder dies after age 75, the income is taxed at the recipient’s marginal rate.This can be very tax efficient when recipients are basic rate tax payers or have no income.

• Direct gifts into discretionary trusts is a common and effective planning strategy. However, clients may be reluctant to lose control of assets and commit to a legacy planning strategy.

• Legacy planning solutions that offer clients some potential access to their funds for additional income or just for peace of mind, are therefore popular. 
  
  
• The Just For You Lifetime Mortgage can be an effective solution for clients with the following legacy planning objectives, subject to lending criteria:
  • gifts to children / grandchildren
  • direct gifts into UK trusts
  • discounted gift trusts
  • gift and loan schemes, and
  • flexible reversionary trusts